Bank of America(NYSE: BAC), one of the world's largest banks, just reported its first-quarter 2024 results. Both of the headline figures, revenue of $25.8 billion and diluted earnings per share of $0.76, exceeded the average of analyst expectations. This might be enough reason for shareholders to cheer the news.
This top financial stock has been on an impressive run, rising 35% in just the past six months. You might be wondering if you should buy Bank of America hand over fist right now. It might make sense to ride the momentum.
But you might want to think twice before doing that. Here's why.
The challenges of being a bank
At a high level, a bank pays interest on its deposits, while at the same time earning a yield on the loans that it makes. The difference, known as net interest income (NII), is a key metric for a bank. Investors want to see this number go up over time, as it demonstrates proper risk management and the ability to lend and price credit successfully.
Despite beating analyst estimates on the top and bottom lines, Bank of America's NII fell 3% year over year in Q1 to $14 billion. The weakness of this important number shows how difficult the current rate environment is for banks.
On the one hand, they must pay depositors more or risk losing them to the competition. The company's interest rates on savings are still well below the national average.
But at the same time, banks aren't seeing strong demand from borrowers to take out loans, amid higher interest rates. Bank of America's average loans and leases rose by just 1% in the first quarter from Q1 2023, which didn't offset the growth of deposits. As a result, the business is getting squeezed where it matters most.
The Federal Reserve originally planned to implement multiple rate cuts this year. However, inflation is proving to be stubborn. What if the central bank is forced to leave rates where they are for longer to curb rising prices across the economy? Pressure on Bank of America's NII could be a trend that continues for the foreseeable future, at least until rates start to come down. But who knows when that will be?
For what it's worth, two of the company's rivals, JPMorgan Chase and Citigroup, posted a year-over-year NII jump. To be fair, each of these money-center banks have diversified business models and variations in what their biggest revenue drivers are. Nonetheless, it further points out Bank of America's struggles.
Buffett's forever holding
Even considering what I argued above, some investors might find Bank of America to be a compelling investment opportunity. The shares trade at a price-to-book ratio below their trailing-three-year average.
Berkshire Hathaway owns 13.1% of the stock outstanding, representing 10.2% of the conglomerate's investment portfolio. The great Warren Buffett might view Bank of America as a forever type of position, particularly when you consider how essential banks are to the functioning of our economy. There will always be a need for the products and services they offer. Moreover, Bank of America has successfully made it past previous economic downturns.
However, I'm not comfortable owning a business that experiences cyclicality like this. It adds risk to the portfolio, mainly because no one can accurately predict when recessions will happen or how severe they will be. It's a battle of trying to correctly time the market.
I'll gladly pass on this situation. Investors should be cautious.
Should you invest $1,000 in Bank of America right now?
Before you buy stock in Bank of America, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Bank of America wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 15, 2024
Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.
